O&G

O&G: Morgan Stanley is calling it quits on its Overweight call on the energy sector, after upgrading it at the start of 2015, on grounds that the oil supply glut will be here to stay.

Lowering the sector to Market Weight, the house opines that the supply situation in oil will not improve for at least another 12 months and that investors would be able to find better entry points in the next six to nine months instead.

The downgrade was in part due to the realisation that the US shale revolution had meant that US shale drillers can continue to make decent margins even at US$60/bbl. This is evident in US crude oil production, which has not wavered even though prices have fallen drastically.

In fact, the house posits that crude oil is not much different from natural gas, implying that low prices are here to stay. The futures curve for WTI crude supports this claim, with contracts for 2023 delivery priced below US$60/bbl.

With oil prices set to be stuck in the doldrums, the offshore sector looks set to continue to be buffeted by headwinds including concerns over high debt levels as well as contract cancellations.

At a recently concluded stress test, Maybank-KE notes that the offshore sector could face a far worse shakeout should oil prices lead to a 10% cut in revenue.

Overall, the stress test revealed most at risk counters include Vard (Sell; TP: $0.39), Cosco (Sell; TP: $0.40) and Swiber (Hold; TP: $0.30), while Ezion (Buy; TP: $1.40) should be able to weather the storm better with its more secure liftboat charter contracts.